The approval paves the way for Volvo to borrow €500 million ($708 million) from the European Investment Bank (EIB) to help fund the €1.9 billion project to develop more environmentally friendly cars.

Europe’s top competition watchdog said that the state aid was in line with EU

guidelines for providing access to financing in the face of the economic

crisis.

“The state guarantees would contribute to Volvo’s investment project for environmental-friendly cars without giving rise to any undue distortions of competition”, Competition Commissioner Neelie Kroes said in a statement.

The loans, which will be guaranteed by the Swedish government, will be provided in five installments through the end of 2010 and have a maturity of seven years.

On March 12, the European Investment Bank granted 3.0 billion euros in loans to a number of European carmakers, including to Volvo Cars.

But the securing of those loans was dependent on the Swedish government agreeing to act as a guarantor.

Although Volvo Cars spokeswoman Maria Bohlin welcomed the EU approval as “positive” she said that the company “will not have the money today” because talks with government on the guarantees have been on ice since early May.

The negotiations are suspended “as long as the question of the car maker’s owner has not been resolved”, she said in reference to Ford’s plans to sell its Swedish brand.

Since the break down, Volvo has also been in talks about loan guarantees with the Flemish regional government in Belgium.